Market commentary

Yesterday we saw a weak European session as the Federal Reserve’s monetary policy meeting, which somehow suggested an earlier raise in interest rates than previously anticipated, hindered investors’ sentiment. While only a few investment houses reviewed their interest rate forecasts so far, the markets’ reaction is evidence of surprise; the stocks performed poorly and the US yield curve flattened after the two years Treasury yields reached 0.42% from 0.35% on Tuesday. Later in the day we saw positive US economic data with the initial jobless claims holding strong for a second week and a leading manufacturing gauge indicative of positive developments. There was some disappointment in the existing home sales data but given the sector’s sensitivity to weather conditions this was overlooked by the US investors who pushed the stock indexes higher. We would expect the European market to show the same rebound today but for now the futures point to a mixed opening. We also see scope for a decoupling of the Bund yields from the US treasuries given that the Eurozone is lagging behind the US; this contrasts with the increase in short term Bund rates seen since Tuesday.

The Chinese stock market also performed positively although in this case the sustainability is questionable given that it comes after a week of record outflows; according to Citigroup, which quoted EPFR global data, the local equity funds suffered a USD 1.5 billion outflow for the week ended March 19. Furthermore, a private survey which seeks to resemble the US’ Beige Book concluded that the economy is slowing down. So far disappointing economic data drove only modest revisions in GDP, with the latest consensus standing at 7.4% in March from 7.5% in February (Bloomberg data). Perhaps more important is not the magnitude of the downgrade but the fact that the market now expects growth to miss the authorities’ target of 7.5% annual advance.

A piece of good news for the banking sector, particularly for the peripheral banks is the conclusion of the framework for handling euro-area falling banks. As expected, this welcome progress helped the high yield subordinated bonds tighten yesterday; there was however virtually no effect on investment grade issues. In US, the financial sector is also biased to see positive performance after Feral Reserve’s stress tests were passed by 29 out of 30 banks.

The Western leaders have made some benign progress in answering Russia’s aggressiveness and maintained the threat of further action. Against this background, Fitch cut its outlook for Russia to negative. Even without economic sanctions the Russian economic outlook deteriorated as the recent rebel attitude can only aggravate the capital outflow which the country has been seeing for years. Indeed, even before the Russian-Ukrainian crisis the general consensus was that without a reform of the business climate the growth potential is 2% at best. To be fair, the consequences are hard to estimate at this stage as they depend to a large extent on how impacted the investors’ confidence will be. In any case, some of the analysts already slashed their 2014 growth forecast to below 1.4%, from over 2% in February; Deutsche Bank actually sees a slowdown to 0.6%.

Today the markets will have to assess the latest data on EU consumer confidence, euro-area’s current account and, during the US session, speeches of some of the FOMC members. Also, the EU summit continues in Brussels.

Have a nice day,

Raluca

The Calamatta Cuschieri Traders Blog is available daily on CC WebTrader. Other market coverage including coverage of the International Bond Markets is also available.

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